Rachelle Sampson, Associate Professor of Logistics, Business and Public Policy, University of Maryland
Presenter: Rachelle Sampson, R. H. Smith School of Business, University of Maryland
Paper: Evidence and Implications of Short-termism in US Public Capital Markets: 1980-2013.
Abstract: In this paper, we provide evidence of increasing short-termism in US capital markets over the period of 1980-2013. Using a ‘market discount factor’ estimated for publicly traded firms based on a capital asset pricing model, we show that US capital markets have become increasingly short-term oriented over the past thirty years. We corroborate this finding by estimating the impact of various investment behaviors and relevant ownership variables on our measure of short-termism, market discounting. We find that the market more heavily discounts firms that have less financial slack, spend less on capital and/or have greater analyst coverage. Consistent with prior research, we also find that public firms that are held by more transient institutional investors (i.e., investors that have significant turnovers of stocks) are more heavily discounted than their counterparts that are held by dedicated investors (i.e., investors that hold company shares for the long term). To examine the impact of short-term valuation on firm behavior, we estimate the impact of short-termism on capital spending using changes in a firm’s institutional ownership type (e.g., a switch from transient to dedicated or vice versa) as an identification mechanism. We find that short-term market valuations are significantly negatively correlated with future capital investment. Overall, these results suggest that market discounting may proxy for firm short-termism. To our knowledge, this is the first paper to demonstrate economy-wide, firm-level evidence of increasing short-termism and the implications for investment behaviors by firms.
The BEPP seminar series showcases the scholarship of leading faculty from prominent universities across the nation and around the world. The CBPP presents this seminar series jointly with the Strategy, Economics, Ethics and Public Policy faculty of the McDonough School of Business, a multi-disciplinary group whose primary research and teaching interests lie in Economics, International Business, International Political Economy, Organizational Theory, and Strategy.